Tata Communications' Q2FY19 results (Neutral) - Better operating performance
Q2FY19 result highlights
- Q2 operating performance above estimates: Cons. Revenue was up 3.2% qoq to Rs40.6bn (voice -2,7%; data +5.2% qoq in INR terms; IDFCe Rs40.3 bn); Cons. EBIDTA was up 7 % QoQ , 6% YoY at Rs. 6.3 bn (IDFCe: Rs.5.85 bn) in Q2FY19 . Cons. margins for Q2FY19 are at 15.5 % above our estimate of 14.5%. Growth Services have turned EBITDA neutral this quarter and this has led to EBITDA growth and margin expansion. PAT came in at Rs. 6 mn vs. IDFCe of –Rs44 mn. Net Debt for the quarter was at USD 1.27 Bn an increase of USD 117 Mn as compared to last quarter. Increase is on account of working capital movement and high capex spend during the quarter.
- Weak data business performance: Traditional Services revenue for the quarter stood at USD 287.3 mn and witnessed a decline of 1.3% QoQ and 3.3% on YoY basis Data revenues were at Rs 30.6 bn vs. IDFCe of Rs30.3 bn. Overall data margins came in at 17.5% vs. our estimate of 17.3 %, down 19 bps qoq. Growth was impacted due to 1) Operator consolidation in India 2) IndAS 115 impact. Rental income on INR 310 m is included in data revenue in this quarter.
- Growth services posts strong sequential revenue momentum: Growth services continues to record robust performance as revenue increased to USD97.6 mn (+14% yoy) in Q2FY19. EBITDA losses in growth+innovation services portfolio stood at USD13.2mn vs. USD20.3m in Q1FY19. The sharp reduction in EBITDA losses in growth services and even aggregate losses in growth+innovation services have reduced is a key positive & management expects neutral growth ahead.
Key positives: Good performance in growth services.
Key negatives: Disappointing growth in voice.
Impact on financials: FY19E/FY20E EPS are unchanged.
Valuations & view
Growth services did well with strong revenue momentum & EBITDA breakeven, but traditional basket performance was muted due to increased pricing pressure. We note that sharp reduction in EBITDA losses in growth services & even aggregate losses in growth+innovation have been reduced. Management expects neutral growth ahead in this vertical. Valuations aren’t expensive but fair considering modest growth. Maintain Neutral with unchanged target price of Rs570.​
Tata Communications is a provider of communications. Co. delivers managed solutions to multi-national enterprises, service providers, service providers and Indian consumers. Co. offers international and national voice and data transmission services, selling and leasing of bandwidth on undersea cable systems, Internet dial up and broadband services, and other services comprised mainly of mobile global roaming and signaling services, transponder lease, data centers, telex and telegraph and television uplinking. Co. operates in the following three segments: Global Voice Solutions, Global Data and Managed Services and South African Operations.
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